Market update Bond prices experienced a downward trend in 2022 due to the Federal Reserve’s efforts to counter high inflation through interest rate hikes. However, with the possibility of a halt to rate increases, investors now have the opportunity to explore attractive yields in short-term bonds.
Short-term bond funds encompass mutual funds and exchange-traded funds (ETFs) primarily engaged in investing in government and corporate bonds with maturities of fewer than five years. These bonds exhibit lower sensitivity to interest rate fluctuations compared to their longer-term counterparts, providing investors with a degree of protection against potential rate hikes.
Short-term investments minimize risk, but at the cost of potentially higher returns available in the best long-term investments. As a result, you’ll ensure that you have cash when you need it, instead of squandering the money on a potentially risky investment. So, the most important thing investors should be looking for in a short-term investment is safety.
Understanding Short-Term Bond Funds
Short-term bond funds represent mutual funds and exchange-traded funds (ETFs) that predominantly invest in government and corporate bonds with maturities of less than five years. These bonds are less sensitive to interest rate changes compared to their longer-term counterparts, offering investors a measure of protection against potential rate increases. It’s crucial to note that as interest rates rise, bond prices fall, and vice versa.
Yield and Suitability
Investors in short-term bond funds earn a yield, indicating the income generated by the bonds in the portfolio relative to their current market price. These funds are particularly suitable for individuals with short-term financial goals, as money earmarked for use within the next three to five years can be invested in short-term bonds, providing a reasonable rate of return with relatively lower risk.
Investors participating in short-term bond funds receive a yield, which signifies the income generated by the bonds in the portfolio relative to their prevailing market price. These funds are particularly well-suited for individuals with short-term financial objectives. Money earmarked for use within the next three to five years can be strategically invested in short-term bonds, offering a reasonable rate of return with a relatively lower level of risk.
Top Short-Term Bond Funds
- SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
- SEC yield: 5.69 percent
- Expense ratio: 0.04 percent
- AUM: $7.0 billion
- iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
- SEC yield: 5.69 percent
- Expense ratio: 0.04 percent
- AUM: $21.4 billion
- Schwab 1-5 Year Corporate Bond ETF (SCHJ)
- SEC yield: 5.70 percent
- Expense ratio: 0.03 percent
- AUM: $384.0 million
- Vanguard Short-Term Bond ETF (BSV)
- SEC yield: 4.97 percent
- Expense ratio: 0.04 percent
- AUM: $32.0 billion
- Fidelity Short-Term Bond Fund (FSHBX)
- SEC yield: 5.09 percent
- Expense ratio: 0.30 percent
- AUM: $2.5 billion
Short-term bond funds emerge as a prudent avenue for investing funds with a short time horizon, striking a balance between return potential and risk mitigation. While not entirely immune to risk, these funds are generally considered safer than high-yield bonds or investments in the stock market. While not entirely risk-free, these funds are considered safer than high-yield bonds or stock market investments. Investors seeking yields with even lower risk may consider money-market funds. Investors seeking yields with even lower risk might explore the option of money-market funds.